Cascade Bancorp Has A Bullish Engulfing Pattern

05/24/07 11:37:06 AM

by Chaitali Mohile

CACB is in an intermediate downtrend. Will a bullish engulfing pattern really offer a reliable buying opportunity?

Security: CACB
Position: N/A

Cascade Bancorp (CACB) entered an intermediate downtrend from January 2007. The stock went through many volatile sessions, whipsawing many traders. The strong downtrend began with a high made at $31 (Figure 1). The stock was thus dragged to its low level of $20, losing its profit of $11. The bullish engulfing candle creates some buying opportunity on stock. CACB formed an engulfing pattern on the Friday closing. Did it really open a buying position?

FIGURE 1: CACB, DAILY. A bearish moving average crossover and downtrend are not good conditions for new long positions. Bullish engulfing patterns on the daily chart is not suitable for fresh buying.

Graphic provided by: StockCharts.com.

The stock made a bearish moving average crossover with a 50-day moving average below a 200-day moving average, and the price usually follows this moving average direction. So the price will first face two strong resistances of both moving averages, which can be violated, only on heavy volume or strong bullish strength. The relative strength index (RSI)(14) moved out of an oversold zone and rallied to $38 but still lacks positive strength. So the bullish engulfing pattern may face its first resistance of a 50-day moving average, and the RSI may lack positive strength.

The average directional movement index (ADX)(14) is 39 with a negative directional index (-DI) at 29. The ADX thus indicates a strong bearish trend. In such a scenario, any long position has the possibility of failing. There are traders who trade such small and risky positions of $2 (24 50-day moving average resistance - 22 bullish engulfing level), but wise traders need not take a long position on the stock in a downtrend.

FIGURE 2: CACB, WEEKLY. CACB may face a 50-day moving average resistance in its bullish move.

Graphic provided by: StockCharts.com.

The weekly chart shows the effect of a double top formed at $31 (Figure 2). At every stage, the stock failed to hold its support. The 50-day moving average support was taken off, resulting in a serious fall in price. An 11-point correction rested with a minor consolidation. The price congestion is a temporary pause in the fall. The RSI(14) has declined from the 60 to the 30 level. The RSI(14) thus indicates a bearish sustaining rally. The ADX(14) at 29 shows a developing downtrend with increasing selling pressure.

Thus, the bullish engulfing pattern does not offer a reliable buying entry for traders. Since Cascade Bancorp is in a downtrend, this buying opportunity should be ignored.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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Cascade Bancorp Has A Bullish Engulfing Pattern

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